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Senate Kills CFPB Rule Aimed at Protecting Minority Car Buyers

Tobie Stanger

Consumer Reports has no financial relationship with advertisers on this site.

Consumer Reports has no financial relationship with advertisers on this site.

A Consumer Financial Protection Bureau policy focused on preventing auto lenders from discriminating against minority borrowers is on its way out.

The Republican-led Senate voted 51-47 on a resolution to eliminate the measure, which advised auto lenders to abide by the Equal Credit Opportunity Act. The House is expected to vote the same way as early as next week. President Donald Trump has said he would sign the legislation to eliminate the policy.

The policy—technically called a “bulletin” or “guidance”—was intended to ensure that auto dealers didn’t increase the interest rate charged to minority borrowers more than they did to white borrowers.

Dealers who get an interest-rate quote from a third-party auto lender typically have the discretion to raise that interest rate to the customer and keep some or all of the difference in the two rates. That difference they pocket is referred to as the “dealer markup.”

The guidance, which the CFPB announced in a bulletin published in 2013, reminded dealers to abide by federal equal-credit laws when establishing their dealer markups.

Differences Over CFPB Authority

Consumer advocates say a rollback of the policy would make borrowers of color vulnerable to overpricing by unscrupulous car dealers and lenders. 

“Dealer markups on auto loans often result in higher costs for minority borrowers compared with white borrowers with similar credit records,” says Pamela Banks, senior policy counsel for Consumers Union, the advocacy division of Consumer Reports.

“The CFPB’s guidance simply highlights the potential liability auto lenders face from discriminatory dealer markups and how that can be avoided,” she says. “Congress shouldn’t hamper federal efforts to address auto-lending discrimination by passing this ill-conceived resolution.”

Banks pointed to a recent study by the not-for-profit National Fair Housing Alliance, based in Washington, D.C. The study had white and nonwhite testers shop for the same car at the same dealerships within 24 hours of each other.

In most cases the more qualified nonwhite applicant was offered a more expensive car loan. On average, nonwhite borrowers were charged $2,662 more than white borrowers over the life of the loan.

A 2015 National Consumer Law Center report (PDF) on car lenders’ practices over many years showed widespread differences in auto loan rates provided to auto loan borrowers, unrelated to credit risk.

Critics of the CFPB guidance say the agency overstepped its authority in promulgating its car-lending guidance.

The Dodd-Frank Act, which formed the CFPB, specifically left out jurisdiction over auto dealers but not over auto lenders. By issuing an informal guidance instead of a rule—and bypassing the regular review required of proposed rules—the bureau skirted the law, these critics say. 

“The CFPB’s 2013 Auto Bulletin was a backdoor attempt at rulemaking without notice or comment and lacked the clarity needed by lenders,” says Richard Hunt, president and chief executive of the Consumer Bankers Association.

Hunt asserted that CBA member banks are strongly committed to ensuring fair-lending policies.

“For that reason it is critical to have clear rules and guidance from regulators so our member banks can be certain of compliance,” he says. 

In overturning the rule, the Senate used the Congressional Review Act in an unprecedented way.

The act, which allows Congress to reverse rules set by regulators within 60 days of their introduction, hasn’t until now applied to regulators’ guidance or bulletins such as the CFPB’s auto-lender rule. But in December the Government Accountability Office determined that the guidance could be subject to review under the act, as with a regulation. 

What's the Long-Term Impact?

Lenders and dealers could benefit from the rollback of the guidance, says Charles Gabriel, president and a managing director at Capital Alpha Partners, a policy research company based in Washington, D.C.

“Dealers have even more to gain, given the high percentage of their profits these revenue-sharing agreements have long represented,” he says.

Observers say the Senate’s precedent-setting use of the Congressional Review Act could lead to more of the same in the future. 

“Congress has never before used this power to invalidate an action, such as the CFPB’s auto lending guidance, that a regulatory agency does not itself characterize as a regulation,” the Consumer Federation of America said in a press release.

What Can Consumers Do?

The Senate’s move comes a few weeks after the CFPB’s acting director, Mick Mulvaney, moved the Senate’s Office of Fair Lending and Equal Opportunity to his office.

Experts in that department will no longer file legal enforcement actions against alleged bad-faith lenders and instead focus on “advocacy, coordination, and education,” Mulvaney says.

That move means less pressure on car dealers and lenders, consumer advocates say. And it means car buyers will need to be more vigilant on their own. 

Consumer Reports recommends, for instance, that car buyers establish their financing before they even enter the car dealership to sign the paperwork.

James Bragg, founder and manager of Fighting Chance, a service that provides information for new-car shoppers and is based in Long Beach, Calif., suggests calling up several lenders to get a variety of quotes.

“Make them compete on the interest rate,” he says. “Start with your bank. The question is, can Honda beat the bank’s rate?”

They also can ask dealers to tell them the markup on the loan or loans offered, in order to make a comparison, Banks says.

Auto-loan borrowers who suspect they’ve been discriminated against also can complain to their state attorney general, Banks says. And they can complain using the CFPB’s Consumer Complaint Database.

“It’s still a violation of consumer-protection laws,” she says.

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